A new servicing model.

Author:Sheridan, Terry
Position::SERVICING
 
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Three large non-bank servicers are creating quite a stir with their move into the servicing business. Let's just say they have caught the attention of regulators--and the rating agencies.

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These are hardly easy times for any mortgage servicer. But non-bank companies are under especially tough scrutiny. And for good reason, say some analysts, regulators and industry experts. [paragraph] Just three years ago, the top 10 mortgage servicers were banks. Now, almost half are not and they service more than $1 trillion of loans--about 10 percent of the residential mortgage market--but many of those loans are distressed. [paragraph] The Big Three non-bank servicers--Ocwen Financial Corporation, Atlanta; Nationstar Mortgage, Lewisville, Texas; and Walter Investment Management Corporation, Tampa, Florida--have acquired billions of dollars of servicing rights for troubled loans last year alone. That's raised questions about how they'll handle that influx of servicing and the costs associated with it.

Neither Ocwen nor Walter responded to interview requests for this article. A Nationstar executive was unavailable.

GSEs weigh in

Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are scrutinizing such transfers. Warren Kornfeld, senior vice president of the financial institutions group at Moody's Investors Service, New York, says the agencies are considering a threshold for servicing transfers that he's heard could be $20 billion or 25,000 loans that would require pre-approval by the Federal Housing Finance Agency (FHFA).

In an email to Mortgage Banking, Jon Greenlee, FHFA deputy director of enterprise regulation, says: "To address structural changes occurring in the mortgage servicing industry, [FHFA] issued supervisory guidelines to Fannie Mae and Freddie Mac for contingency plans for high-risk or high-volume counterparties."

FHFA declined further comment. But the agency's 2013 advisory bulletin about such contingency plans expects an eight-step process should be in place to minimize risk and exposure to the counterparties--including exit strategies.

Tara Malone, Fannie Mae's vice president of special asset portfolio management in Dallas, says the GSE wants to ensure servicers have the ability and capacity to provide borrowers the best solutions as quickly as possible.

"We want to make sure we understand these transactions as [servicers] grow," she says. "We look at staffing and technology, and if they can support the homeowners. We are going to monitor that."

When asked if Fannie Mae is concerned about non-bank servicers' rapid growth, Malone says, "They are not growing without us."

Regulatory elephant in the room

New regulatory scrutiny adds likely the largest extra layer of concern for non-bank servicers. The Consumer Financial Protection Bureau's (CFPB's) servicing rules took effect Jan. 10.

While large servicers already were working to meet that deadline, a "potential problem lies with smaller independent/ non-bank servicers," said Fitch Ratings, New York, in a report issued three days before the new rules took effect.

While Fitch acknowledges the management expertise and modern servicing technology adopted by non-bank servicers, the new rules will require more accounting and infrastructure improvements, and the costs associated with that. And the higher the costs, the more loans a servicer must handle to remain profitable, Fitch points out.

Large servicers may absorb higher fixed costs better. Smaller companies could have difficulty in bridging compliance rules with growing their business and managing profitability, according to the report.

CFPB's rules will increase pressure on the cost-competitive nature of servicing, Fitch says. And that might further amp up consolidation in the servicing business.

Eleven months before the new rules took effect, CFPB was sufficiently concerned about loan servicing transfers to issue a bulletin describing what precautions servicers needed to take. For example, the bureau holds servicers accountable for 14 steps or procedures under three broad categories involving servicing transfers: 1) How a transferor has prepared for a transfer, 2) how a transferee is prepared to handle the new loan servicing and 3) how the transferor and transferee are prepared to handle loans with loss mitigation in process.

The bureau also warned that its examiners would be looking for servicer violations of several federal laws, including the Real Estate Settlement Procedures Act (RESPA), Fair Credit Reporting Act (FCRA) and Fair Debt Collection Practices Act (FDCPA); and unfair, deceptive or abusive acts or practices (UDAAPs).

State and federal regulators get involved

At the New York Bankers Association's...

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